Charitable Remainder Trust: Frequently Asked Questions

1. What is a Charitable Remainder Trust?

A Charitable Remainder Trust is a special tax-exempt irrevocable trust arrangement written to comply with federal tax laws and regulations. You transfer cash or assets (especially appreciated assets) to the trust and may receive income for life or, if you choose, a certain term of years (not to exceed 20). In fact, the income can be paid over your life, your spouse’s life and even your children’s and grandchildren’s lives.

2. What section of the IRS code governs whether a trust qualifies as a CRT?

IRS code section 664 lists the requirements a trust must meet in order to qualify as a Charitable Remainder Trust. The Charitable Remainder Trust was made possible by the Tax Reform Act of 1969.

3. How much income can the income beneficiary receive?

The minimum payout rate is 5% and the maximum is 50%. The payout rate may be further limited by a 10% remainder interest requirement, which applies only to Charitable Remainder Unitrusts. The present value of the remainder interest passing to charity must equal at least 10% of the value of the gift on the date of contribution.

4. What is my income tax deduction based on?

Transfers to a CRT will generate an income tax deduction for you, the donor, in the year of the contribution. The deduction is based upon the estimated present value of the remainder interest that will ultimately go to the charity. The calculation and the amount of deduction allowed is based upon several factors: Your life expectancy based on your age, if you are the beneficiary of the life income. The number of income beneficiaries you name and their ages – you will generally get less of a tax deduction if you name more than one beneficiary. The amount of income you want of the cash flow generated by your gift (you must take at least a 5% annual return up to a maximum of 50%), and the type of CRT you select -Annuity Trusts and Unitrusts have different formulas for computing the tax deduction.

5. If I cannot use my deductions in one year, can I carry the excess over to future years?

YES. The remaining deduction is available for five additional years after the initial year of the transfer.

6. Can the income beneficiaries be changed?

NO. An income beneficiary may not be added. However, when the trust is drafted, it may allow for a contingent beneficiary through a special provision. The contingent beneficiary may be removed only by the donor’s will and may not be replaced.

Our law firm has the experience, knowledge, skills and resources to properly draft your CRT based on your charitable estate planning goals.

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